In October of last year, the U.S. Treasury Department published the 2021 Sanctions Review, outlining five steps “to modernize sanctions policy,” including “[c]alibrating sanctions to mitigate unintended economic, political, and humanitarian impacts.” When it comes to evaluating sanctions policy, it can be difficult to determine which harms are truly unintended. In a new case study on Iran sanctions published today by the Sanctions and Security Research Project, I detail how skyrocketing inflation is an intended economic impact of U.S. sanctions in countries like Iran and argue that the humanitarian dimensions of such economic impacts are rarely accounted for by policymakers.
The humanitarian effect of sanctions on the target country is typically judged based on the availability of food and medicine. Overlooked is whether food and medicine remain affordable for ordinary people after the imposition of sanctions. Iran has not experienced systemic shortages under sanctions, but, as outlined in my report, food and healthcare prices have risen 186 percent and 125 percent respectively since the Trump administration reimposed secondary sanctions in November 2018. Iran’s high rates of inflation are driven in part by government policies. For example, Iran’s government has opted to finance budget deficits created by the impact of sanctions on government revenue by printing money. But, as the World Bank notes in its latest assessment of the Iranian economy, higher food prices, driven by sanctions, were the main contributor to inflation in the last year. The increased cost of these goods is directly contributing to the suffering of ordinary Iranians, whose incomes have not kept up, thrusting millions of Iranian households into relative poverty. For this reason, U.S. sanctions are a kind of “inflation weapon.”
This debilitating inflation persists despite the exemptions permitting humanitarian trade with countries like Iran. In countries subject to U.S. sanctions, companies with a U.S. nexus – that is, some involvement of U.S. persons or U.S. dollars in the proposed transaction – can apply for a specific license from the U.S. Treasury Department’s Office of Foreign Assets Control. International banks, however, have not typically been able to seek such specific authorizations, even though these institutions perceive themselves to have significant exposure to the U.S. financial system. The Treasury Department prefers for financial institutions to conduct their Iran-related business in accordance with general licenses and exemptions – carveouts within the sanctions framework that broadly permit certain kinds of activities with certain counterparties. For example, banks that wish to receive payments related to food and medicine imports facilitated by the Central Bank of Iran can do so under General License 8A, which authorizes transactions that would be otherwise blocked pursuant to the central bank’s sanctions designation under a terrorism authority.
But for most international banks, these general licenses and exemptions are insufficient. Compliance officers in these banks will refuse to greenlight proposed transactions requested by clients unless they are granted specific authorizations or assurances from U.S. officials, whether those are specific licenses or so-called “comfort letters.” Compliance officers are reluctant to rely on general licenses, which are broadly written, requiring significant interpretation. Deciding whether a proposed business activity is covered by a general license can be a leap of faith. Still, Treasury officials have been reluctant to create any system to allow banks to apply for such licenses and letters, meaning there are too few banks are willing to facilitate payments in support of companies doing legal business in sanctioned countries, even if that business is explicitly permitted, such as in the case of humanitarian trade.
Of course, limiting the number of banks that are willing to transact with a sanctioned jurisdiction is a goal of sanctions policy. Creating bottlenecks in financial services can devastate an economy, making it difficult for the targeted country to remain connected to global markets. As banks in Iran saw their international banking relationships cut, and as the international reserves of the central bank were frozen, significant disruptions in trade followed. In the case of Iran, these bottlenecks have contributed to a devastating increase in the price of food and medicine – goods that are ostensibly exempted from sanctions.
If U.S. policymakers are serious about limiting the humanitarian harms of sanctions, they need to actively calibrate the bottlenecks that they deliberately create with their sanctions policies. In particular, the United States must ensure that there are enough banks supporting humanitarian trade and that those banks that are facilitating payments are not engaging in profiteering. Banks that do opt to support permissible trade with sanctioned countries often charge transaction costs of as much as 6 percent. These exorbitant fees are passed on by exporters to the importers in the sanctioned country, who in turn pass the costs along to their customers. This means that some international banks are exploiting bottlenecks to pad their profits while exacerbating the humanitarian harms of sanctions.
In recent weeks, economists in the United States and Europe have been debating whether rising inflation in Western economies calls for the return of price controls, particularly in light of evidence that companies are pocketing historic profits as they boost prices citing the inflationary environment. For now, the consensus appears to be that price controls are unnecessary as the price increases are transitory, meaning that the bottlenecks affecting trade in the United States and Europe should ease in the coming months without major state intervention. But in the case of sanctions, where Western governments are actively creating and sustaining similar bottlenecks, price controls may be the key to a more humane sanctions policy.
To create such controls, Western governments should reinvent their approach to licensing, particularly with regard to humanitarian trade. While bottlenecks are to be expected in any sanctions campaign, a fundamental reason why prices for humanitarian goods skyrocket in targeted countries is that there are too few banks willing to process payments in relation to the number of companies willing to export humanitarian goods to buyers in those countries. So, the licensing scheme ought to get more banks involved in the trade. But even if more banks do opt to accept payments on behalf of exporters selling humanitarian goods to sanctioned countries, inflationary pressures will still exist if those banks charge abnormal transaction fees. Crucially, while inflation can result from choices made by the target government – for example the decision to “print money” to finance budget deficits stemming from sanctions – the price gouging by international banks represents a clear instance in which the humanitarian harms stem from the policy failures of the countries imposing sanctions.
Many banks would take advantage of a new scheme that aims to grant specific licenses more liberally, giving compliance offers in banks confidence that the payments processed on behalf of their clients will not fall afoul of regulators. At the outset of the COVID-19 pandemic, sanctions expert Richard Nephew, who is now Deputy Special Envoy for Iran in the Biden Administration, even called for the issuance of “comfort letters for every entity in the [supply] chain” in order to maximize efforts to “facilitate transfers of humanitarian goods to sanctioned countries.” But the Treasury Department should not simply provide specific licenses or comfort letters to banks and suppliers that will pad their fees and prices, contributing to the inflation that exacerbates the humanitarian harms of sanctions programs by making basic foods and medicine less affordable. For this reason, any expanded licensing scheme designed to get more banks and suppliers involved in humanitarian trade with sanctioned jurisdictions should make the provision of those licenses conditional on appropriate pricing for the provided goods and services.
In such a scheme, the Treasury Department would launch “tenders,” announcing that a certain number of specific licenses will be provided to financial institutions that can demonstrate that they have significant demand from clients to facilitate payments related to humanitarian exports to a sanctioned jurisdiction, and that they have a robust compliance framework in place to prevent illicit payments being made on behalf of sanctioned entities. But crucially, those banks bidding on the tenders would also need to disclose the price at which they will be providing banking services, and this price will be part of the Treasury Department’s evaluation – the banks that can demonstrate they will process the largest volume of trade with the lowest transaction costs will be most likely to have their bid accepted, and thereby secure a coveted license. The limited number of banks that win such authorization will gain access to a lucrative market and put themselves in pole position for broader operations when sanctions relief is eventually granted to the country in question. Similar tenders can be run for manufacturers, logistics companies, and insurers that make up the rest of the humanitarian supply chain, although this will require a significant expansion of administrative resources within the Treasury Department. Encouragingly, the fifth item in the 2021 Sanction Review’s agenda is “investing in modernizing Treasury’s sanctions technology, workforce, and infrastructure.”
Over the years, as sanctions have become a mainstay of Western statecraft, U.S. administrations have repeatedly come under pressure to address the humanitarian harms of sanctions. In response, officials have repeatedly promised to create a system of special financial channels that would ensure that the crucial payments necessary to facilitate humanitarian trade can be made more easily, even as tough sanctions on adversaries are maintained. U.S. officials attempted to set up such channels in countries such as Switzerland and South Korea to ease humanitarian trade with Iran, but these efforts failed in part because of a lack of willingness to think laterally about licensing.
In the meantime, inflation continues to ravage Iranian livelihoods. Today, nearly three-fourths of Iranians believe that the United States is “seeking to prevent humanitarian-related products from reaching Iran.” For ordinary people, if the goods on the supermarket shelves are unaffordable, then they are unavailable. Inflating the price of food and medicine in no way advances U.S. national security interests; to the contrary, it diminishes the perception of the United States among ordinary people in countries targeted with sanctions. U.S. policymakers are aware of this issue: the 2021 Sanctions Review declares the Treasury Department’s readiness to spend “significant time and effort to ensure the world understands that the provision of legitimate humanitarian assistance reflects American values.” Standing by those values means ensuring that skyrocketing food and medicine prices have no place in modern sanctions policy.